VW Says Emissions Scandal Bill Could Get Much Bigger

Volkswagen is battling to rebuild its reputation after admitting to cheating U.S diesel emissions tests in September last year. REUTERS/Fabrizio Bensch

By Andreas Cremer and Edward Taylor

WOLFSBURG, Germany, April 28 – Volkswagen’s emissions test cheating scandal could cost it much more than the $18 billion earmarked so far and it might have to sell assets to foot the bill, the German carmaker said on Thursday.

Europe’s biggest motor manufacturer, battling to rebuild its reputation after admitting to cheating U.S diesel emissions tests in September, said cost cutting and encouraging sales in China and Europe should help it deliver a solid operating performance this year.

But it warned of challenges ahead, as it strives to make big savings at its underperforming VW brand in the face of union opposition and reform a highly centralised company structure blamed for lax controls and delays to new models.

The emissions scandal inevitably casts a long shadow.

While Volkswagen struck a deal last week to buy back or fix affected vehicles in the United States and settle some legal disputes there, it still faces U.S. Justice Department fines as part of an expected civil settlement and an ongoing Justice Department investigation that could lead to criminal charges.

In its annual report published on Thursday, Volkswagen said it could face “further significant financial liabilities” and that “the funding needed to cover the risks may lead to assets having to be sold,” without elaborating.

Analysts have previously speculated Volkswagen might sell its trucks business to raise funds, but Chief Executive Matthias Mueller told reporters that wasn’t under consideration for now.

Finance chief Frank Witter added there were no plans to sell any of the company’s brands or businesses and it believed it had made adequate provisions to cover legal and regulatory costs.

“We believe in our multi-brand company, and in the strength of our business model, so we do not have asset sales on the agenda,” he told a press conference to discuss 2015 results. “But we are of course thinking about ‘what if’ and in that sense we are preparing ourselves.”

Investors are also awaiting the results of an investigation by U.S. law firm Jones Day into who was responsible for, and who knew about, the emissions test cheating.

VW BRAND

Volkswagen said last week the costs of the crisis drove it to a record loss last year and it was slashing its dividend.

Detailed results on Thursday showed its mass-market VW brand bore the brunt of the scandal, while upmarket brands Audi and in particular Porsche continued to fare well.

The VW brand, which includes the Golf and Passat and is the group’s largest by revenue, plunged to a 127-million-euro loss in the last three months of 2015, compared with a 780-million-euro profit in the same period of 2014. The company cited weak markets in Russia and Brazil as a contributory factor.

The VW brand is in the midst of a 5-billion-euro cost-cutting drive, and the company said on Thursday it expected margins at the brand to improve sharply to 5.5-6.5 percent this year after falling to just 2 percent in 2015.

UBS analysts said reviving the VW brand could be a key driver for Volkswagen’s shares, which are still down around 20 percent since the emissions scandal broke. They have a “buy” rating on the stock, which was down 0.4 percent at 1135 GMT.

But the company faces a battle to cut costs with its powerful trade unions, which occupy about half the seats on its supervisory board. Mueller said on Thursday Volkswagen was still aiming to keep its core workforce, without elaborating.

The company said an improved business structure and increased efficiencies across its 12 brands would be fully in place by the start of 2017, with a business strategy spelling out targets and priorities through 2025 to be published in June.

The company plans in particular to step up development of electric vehicles and digital services. Mueller said he was in talks with third parties over starting a new digital business, but declined to provide details, other than saying the talks did not involve either Apple or Google.

Volkswagen also said long-term savings from the closer collaboration of its MAN and Scania truck brands were now expected to be as much as 1 billion euros, up from 850 million previously